Sunday, January 31, 2010

President Obama's bank plan is a good one and Britain should follow suit

Despite the financial disaster that has destroyed economies and put millions of people out of work, the banking sector is behaving as if the past couple of years had not happened and is lobbying against fundamental reform. Meanwhile, the supply of credit to small businesses remains limited. Voters, who are paying for banking excesses in livelihoods and taxes, remain angry.

Tuesday, January 26, 2010

When President Obama announced a new set of bank reforms last week he changed the agenda for politicians and bankers alike. Obama announced a separation of banking activities and a limit to prevent banks becoming too large. In the UK, the government said it would not adopt the reforms here. Yet the financial crisis has forced governments to think the unthinkable and take the sort of action they previously opposed. Banking separation falls into that category. Labour needs to stay ahead of the reform agenda.

Thursday, January 21, 2010

It is time for wise reform in the national interest

President Barack Obama today announced that he wants to separate the activities that banks engage in. These reforms are along the right lines. The UK should do the same.

The Obama announcement today heralded legislation to limit the scope of bank operations. Announcing the 'Volcker Rule', after Paul Volcker, a former Federal Reserve chairman who has advocated such measures, President Obama announced that he wanted to 'ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.' Obama is concerned that banks are relying on government support to take excessive risks.

President Obama also announced that he wanted to put a limit on the size of banks, preventing institutions in future being 'too big to fail'.

This is a significant announcement today. It echoes the Glass Steagall Act that separated banks after the 1929 Wall Street Crash, until the legislation was reversed in 1999. Why doesn't the UK do the same?

There have certainly been calls for separation of banking operations. The Christian Socialist Movement for example has an Early Day Motion (no 531) before Parliament calling for just that. Yes, it's true that Northern Rock was not an investment bank - but it got involved with toxic assets traded and promoted by investment banks. And of course, Lehman Brothers was an investment bank and was not involved in retail banking at all - but many retail banks got themselves exposed to the racy assets Lehmans was trading. Systemic risk occurred because banks went beyond their core functions. That is why we need a return to more narrow, or utility, banking.

So, what's stopping us? Up until now, it has been collective political will. No government could act, it seemed, without international cooperation. Yet the US has done just that. There is another reason - the stakes are higher in the UK than the US. The financial sector is a larger proportion of the UK economy and the risks of reform can appear larger. It is understandable perhaps that politicians might hesitate - indeed they are wise to think things through.

However, eventually they must act and before it is too late. It is time for vision. They must also guard against both a 'Treasury View' which is stuck in the pre crisis mindset (ie let the financial sector alone) and the intensive lobbying and screaming from banks. The banking sector has demonstrated extremely poor judgement. It cannot reform itself now and it does not want to do so. Its bluff should be called because government's responsibility is to the people. Only clear government (and legislative) action can prevent another crisis.

Figures out today show that unemployment fell in the three months to November for the first time since May 2008. This is good news because it marks a pause, or a halt, to rising unemployment much earlier than most people had feared only a few months ago. Labour should see this as vindication of its employment focused policies. Cutting public spending now as the Conservatives call for (actually they wanted to cut spending months ago) would probably push unemployment much higher. But we should not get carried away.

As the Office for National Statistics states, unemployment fell by 7,000 (the claimant count fell for the second month in a row) but employment levels fell too, by 14,000. There were 28.92 million people in work in the quarter. There were 1.03 million people working part time because they were unable to work full time. This is the highest level since 1992 when the data were first collected. This may represent a change in our labour market ie it is more flexible. This can be grim going into a recession but can mean employment picks up with growth. This recession seems to have affected many sectors of the economy at the same time but it doesn't appear to have knocked out whole industries, despite some very hard times for people. Firms seem to have this time around reduced the hours worked by employees too.

People are more confident about the future economically when they have less fear of rising unemployment. These figures today may help there. However, we need to see a trend before we can draw conclusions. At least however, it does suggest that there is a drag on unemployment rising at the moment, which is a good thing.